Tom-Next is short for ‘Tomorrow-Next Day”, which is a short-term forex transaction that enables traders to simultaneously buy and sell a currency over two separate business days: tomorrow and the next day.
The intention of Tom-Next is to prevent traders from having to take physical delivery of currency, while still being able to keep their forex positions open overnight.
Like commodities, forex trades would normally result in the trader taking the delivery of the asset they have traded.
Tom-Next trades arise because most currency traders have no intention of taking delivery of the currency so require their positions to be “rolled over” on a daily basis.
In forex, the expected delivery day is two days after any transaction, known as the spot date, but tom-next can be used to extend the trade beyond this date.
This simultaneous transaction is an FX swap, and depending on what currency the trader holds, they will either be charged or earn a premium.
Instead of accepting delivery of the currency they have traded, Tom-Next enables the position to be extended, and the trader’s forex broker swaps any overnight positions for an equivalent contract that starts the next day.
When calculated, the difference between these two contracts is the tom-next adjustment rate.
Tom-Next is calculated by adjusting the closing level of your open position with the interest rate, then you would receive an interest payment, but if you are buying a currency with a lower interest rate, you would have to pay interest.
This payment is also known as the “cost of carry“.
Let’s say you trade the EUR/USD by buying €100,000 and selling USD at a price of 1.1266.
In order to keep your position open beyond the expected delivery date, you would need to sell your €100,000 on tomorrow’s date and then buy it back at the new spot price.
The current price of your EUR/USD position is 1.1278/1.1279:
This means that the price is 1.2278 to sell and 1.1279 to buy.
However, the new spot rate is one pip higher at 1.12795/1.12805.
To roll your position, you would be selling at 1.1278 and then buying back at 1.12805, effectively paying 2.5 pips.
In this example, we would say that the tom-next rate is 0.5/2.5.
As a €100,000 EUR/USD trade is equivalent to $10/pt, rolling this position in the market would cost 2.5 x $10 = $25 (plus a small admin fee).